After toiling to cobble together an industry solution to prevent a Lehman failure, the government, in the person of Hank Paulson, flanked by Geithner and Bernanke, determined that Lehman would file for bankruptcy. Paulson was very clear that he could not stomach another bailout, on the heels of Freddie, Fannie and Bear. He was very specific that Wall Street would have to learn a "moral hazard" lesson. From a practical standpoint, Paulson’s reasons for pushing Lehman to file are irrelevant. Outside the bubble of Manhattan, the American public was also weary. A clear majority would not support a bailout. They would regard such action — not without reason — as a use of taxpayer money to bailout a bunch of greedy investment bankers who had brought this on themselves. Moreover, there was little support to be found in Washington for further government backing of Wall Street. Even if memories were long, only a rather small minority of Americans could remember the Great Depression, the last crisis to meet or exceed the severity of our current woes. (The failure of the Bank of the United States early in the Depression has been widely viewed as a mistake that created havoc in 1930s financial markets). And unfortunately, our Congress is not teeming with politicians with a financial or economic background that enabled them to understand the potential implications for the global financial system of a Lehman failure. By mid-September of 2008, bailout fatigue held our government and many Americans in its grip. And so Lehman filed for bankruptcy. There were many factors that over time created the conditions for the failure of a Lehman. In this moment, however, it was largely a combination of government and public sentiment, together with Paulson’s "moral hazard" resolve that required a bankruptcy rather than another shotgun marriage name change like that of Bear Stearns and JP Morgan.
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rnThe filing occurred in the early morning hours of Monday September 15, 2008, with Asian markets well into their trading days. Panic erupted and makets in Asia plunged. As the world rotated and sunlight crept westward across our planet one market after another experienced near free fall, with equity markets in the U.S. experiencing their worst one day drop since 9/11.
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rnSecretary Paulson, caught off guard by the severe market reaction toi the Lehman bankruptcy quickly shifted gears. He hastily met with key Congressional leaders to inform them that if they failed to act quickly to stabilize financial markets the world as they knew it would alter in a matter of days. In this careening environment, public and government opposition to widespread bailouts waned. "Moral hazard" was certainly no longer Paulson’s first priority, as he quickly moved to salvage AIG. To his discredit, he soon indulged in revisionist reasoning, claiming that a Lehman bankruptcy could not be prevented due to legal impediments. Bernanke and Geithner used the same excuse to dodge blame — Geithner at his Treasury Secretary confirmation hearing. This is simply untrue. The same mechanism utilized to enable JP Morgan’s absorption of Bear could have been used to enable Barclays to acquire Lehman without a Chapter 11 filing. The rest is well known. The government passed the extremely messy TARP legislation, a bill replete with pork, and proceeded to clumsily manage the financial system that many considered quasi-nationalized.
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rnThere are few who will argue that any economic system other than capitalism has proved it can endure. And certainly free markets, unfettered by unnecessary regulation are a desirable feature of our capitalist world. The key word here, however, is "unnecessary." How extraordinarily preferable it would be if we could trust financial market players to police themselves, as Greenspan long believed they were well-suited to do. There would be no reckless risk accumulation and no failures of large financial houses. But this is not the world in which we all live. Poor judgment, greed, arrogance, and distorted reasoning are not in short supply. The departures of Dick Fuld, Joe Gregory, John Thain and others of their ilk from active duty has not rid us of people whose actions reflect these human failings. The recklessness that brought on the current financial crisis will never be driven from Wall Street. This would require a fundamental change in human nature. Moreover, while it is clear that executive compensation has been out of control and one must live in a seriously insular world to argue otherwise, I believe it is unlikely that reduced compensation will solve our problems. The prospect of great wealth is certainly an enticement to take risk. Still, at Lehman, for example, those who threw what was ac